Over the past decades, China has become one of the world’s key economic players, to an extent such that, as of today, it is the world’ second largest economy, only behind the United States. For many years now, China’s gross domestic product (GDP) has been growing at double-digit rates, thanks to an economic model which focused on investments and exports. And this focus generated an enormous demand for raw materials under which Latin American economies thrived.

BBVA Research: China’s economy rattles commodity markets

However, the Asian giant is now in the midst of a progressive slowdown process that is driving growth rates down from over 9% between 2008 and 2011 to under 7% in the first quarter of 2015 year-on-year. This slowdown explains the sharp drops in commodity prices. “The key factor driving the stagnation in commodity prices is the decline in China’s growth rate and the country’s new economic focus on consumption and services – which are less intensive in raw materials, especially metals and energy – at the expense of industrial investment and production,” confirms BBVA Research in its publication, Situación Latinoamérica del cuarto trimestre de 2015 (Latin America’s Situation in the Fourth Quarter).

“The sharp correction that China’s stock market went through last August warned about the risks that would result from a financial shock in the country”

Latin America countries, net exporters of raw materials, keep a close look on China’s economy, and have been growing increasingly concerned in recent months, especially on the wake of the market shock that it triggered last summer. “The sharp correction that China’s stock market went through last August warned about the risks that would result from a financial shock in the country, capable of compromising the growth of its domestic expenditure,” explained BBVA Research. “The sheer volume of the capital outflows, and the spike in financial volatility resulted in a broad range of monetary policy measures aimed at containing the deterioration of liquidity conditions and their potential impact on the financing of its heavily indebted business sector.

China’s woes have had a direct impact on commodity markets, causing prices to plummet, but also in Latin America’s financial markets, due to the importance of Asia’s economy for the Region. All this uncertainty and volatility has resulted in sharp declines in the Latin American financial assets, with drops averaging 20% and 10% rates in the fixed and variable income markets since June, respectively. Currencies in the region suffered strong devaluation, with average rates of 8% over the same period.

Latin America’s economy: two diverging trends

In its latest report, BBVA Research forecasts stagnant growth rates in Latin America for 2015 and 2016, although the region will be subject to two diverging trends. On one hand, the Pacific Alliance countries will grow at a 2.4% rate, while Brazil will be hit by a strong recession during these two years. According to BBVA Research, the region’s prospects are the result of a combination of dwindling consumption and private investments rates in these countries, dragged by deteriorating household and business confidence levels – a cyclical slowdown factor in the region – and a less favorable foreign environment, where China’s slowdown has become a crucial issue.

El Niño is the warm phase of the ENSO (“El Niño Southern Oscillation”), a meteorological event defined by prolonged warming in the Pacific Ocean sea surface temperatures. This year’s event is currently affecting the countries of the Latin American Pacific basin, and could be the worst since 1950, due to the impact of the climate change.

How will the largest economies evolve over the next ten years? What yields may be expected from the main financial assets in that period of time? These are the two questions that the BBVA Asset Management’s strategy team has taken into consideration to elaborate a financial plan that allows to properly gauge the strategic asset portfolios it manages for its customers through different vehicles (investment funds, pension funds, SICAVs…).

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